The election will be over tomorrow, and I am very much looking forward to it coming to an end. Now we can finally come together as a nation and begin to make progress on important economic, social, and political issues (I can dream, can’t I?)
For those of you who haven’t voted yet and are trying to quickly learn about the candidates for local, state, and federal level office, here’s a summary of the economic policies and ideologies of Democrats and Republicans. These are general tendencies, candidates from both parties will differ in some ways from the principles their party supports, but the policies that actually get enacted must be supported by a broad swath of the party so they usually reflect the general view among party members.
The Capitalist System: Let’s begin with an overview of how the two parties view the capitalist system. Both Democrats and Republicans believe the market system is the best way to satisfy our economic needs. Where they differ is the degree to which government should use social insurance to protect individuals and their families when the economy goes into a recession, when technological change destroys jobs, when jobs are moved to other countries, and so on. Democrats believe these risks should by widely shared through social insurance such as unemployment compensation and food stamps rather than falling fully on individual workers and their families. That is, they believe in a system known as “social democracy.”
Republicans have a different view. Social insurance, in their view (not mine from the evidence I’ve seen), creates dependency on government programs and blunts the incentive to work. The result is a class of people – the lazy and undeserving – who rely upon the hard-working members of society for their existence. Republicans aren’t entirely opposed to social insurance, but they believe the size and scope of these programs ought to be trimmed considerably.
Market Failure: As just noted, both parties believe that when markets work they are the best way to meet our economic needs. But markets can fail for many reasons such as a high degree of monopoly power, differences in information about a product between the buyer and seller (e.g. patients who are unable to evaluate medical procedures, or a car owner knowing more about the quality of the car than the buyer), and the presence of externalities (e.g. firms that pollute the water or air without incurring the costs of doing so) – the full list is fairly long. And there are some goods, economist call them public goods, which the private sector will not produce at all (national defense is the classic example).
Democrats believe the government ought to intervene when there are market failures through antitrust enforcement (including blocking mergers that increase market power), regulation, and in some cases by producing the good or service itself. An Ohio Republican created the Sherman Anti-Trust Act, which was passed by Congress in 1890. But over time, Republicans became leery of government intervention during market failures. They do not see as much harm from market failure as Democrats, and they have much less faith in the ability of government to fix these problems. They have far more faith in the ability of markets to correct market failures on their own. They also believe that regulation, though needed in some cases, is excessive and should be scaled back considerably.
Response to Recessions: Consistent with their views that government should intervene when the economy experiences problems, Democrats favor the use of monetary policy to combat mild recessions. In severe recessions, when monetary policy alone is not enough, they also favor the use of fiscal policy, particularly government spending. To reduce the chances of a recession happening in the first place, they believe the financial sector should be highly regulated to reduce the chance of costly meltdowns.
Most Republicans agree that monetary policy should be used to smooth fluctuations in output and employment, but they would constrain the Fed’s behavior more than Democrats. In particular, Republicans would prefer that the Fed follow a well-publicized monetary policy rule that automates the Fed’s response to economic conditions (except in exceptional circumstances). They also, in general, oppose the use of policies such as quantitative easing in severe recessions preferring instead that the Fed adhere to the rule for setting policy, they favor deregulation of the financial sector, and they are less supportive of financial system bailouts.
As for fiscal policy, they do not favor the use of government spending in severe recessions, even on things such as infrastructure. They do, however, favor another type of fiscal policy, tax cuts for businesses and the wealthy, and recessions are often used as an excuse to implement their tax-cutting agenda.
Some Republicans go even further and argue that the government should not intervene at all when the economy goes into a recession. According to this view, recessions are cleansing and this “creative destruction” weeds out inefficient firms, something that is necessary for the economy to recover. Government intervention has the effect of propping up these inefficient firms, which slows the recovery and makes us worse off in the long run (Democrats believe that recessions are wasteful, not cleansing – think of all the people who were harmed by the Great Recession – and hence that government needs to try and solve the problem).
Inequality: Some degree of inequality is needed to create the correct incentives in a market system, but the two parties differ on whether excessive inequality reduces economic growth, the degree to which the income of those at the top is earned and hence deserved, and the need for government to address the inequality problem. Republicans argue that the market system rewards people according to their contribution to the economy. People deserve what they get. Any attempt by government to redistribute income would blunt the incentive of those at the top to pursue innovative, entrepreneurial activity and reduce our rate of economic growth.
Democrats disagree. They believe much of the income of those at the top is not due to their contributions to the economy, but rather from unfair bargaining between workers and firms that redirects income upward, market failures, political power that has undermined unions and protected wealthy interests, cronyism on corporate boards, and so on.
Can we, for example, explain the high incomes of financial executives during the Great Recession by all the good they did for the economy? They also believe that excessive inequality can be harmful to economic growth, as some recent empirical evidence suggests, and that if the market system cannot reduce inequality by itself then government must step in and rectify the problem.
International Trade and Immigration: There are other areas where the two parties differ such as international trade and immigration, though on trade the differences are not as great as they once were. Traditionally Republicans were known as the free trade party consistent with their view that government should not interfere in any way with the ability of people to engage in voluntary trade, while Democrats were much more likely to argue that trade deals need to have provisions for things such as environmental standards and working conditions, and that workers displaced by trade should receive generous social insurance to protect them and help them get back on their feet again.
However, in this election Republicans have positioned themselves as the anti-trade party, though it’s not clear the extent to which that will survive beyond Trump. And of course on immigration Republicans have adopted a hard line “build the wall” policy, though they weren’t always as opposed to immigration as they appear to be right now.
Perhaps the difference between the two parties on economic policy can be summarized by the Republican’s faith in markets and their belief that when government tries to help it tends to make things worse rather than better versus the belief among Democrats that capitalist economies need government to keep them on track, to fix market imperfections, to promote equity and equal opportunity, and to ensure that the costs associated with economic shocks are broadly shared through social insurance.
My support for Democrats comes, in part, from the belief that they have the stronger hand by far when it comes to economic policy, but whatever your views happen to be, please vote!